Affordable Housing Projects
Creating Affordable Housing Projects has been a well-intentioned conundrum for Indian developers over the last decade. With real estate development tenets being challenged, hard-earned perspectives have been displaced, and valuable failure learnings have mobilized many success stories in this rather demanding segment.
The definition of affordable housing, like the Indian real estate market, has remained fragmented from city to city and across income classes. This is because both the government (through PMAY) and the private sector have rushed to invest in and build critical and innovative products to address one of the world’s most significant housing shortages.
However, for an Affordable Housing Project to meet stakeholder success criteria, several parameters must come together. Customers getting more space and amenities for less, developers springing communities for good profit margins, and institutional funds making significant exits to keep capital churn afloat are among the criteria.
A successful affordable housing project is essential
A successful affordable housing project is essentially a combination of high sales velocities generated by strategically targeted underserved product segments. IRR motivating land acquisition, FSI optimization (sometimes counter-intuitive but critical), a well-thought-out procurement strategy, and quick execution.
As Steve Jobs once said – “Get closer than ever to your customers. So close that you tell them what they need well before they realize it themselves.” To ensure the success of affordable housing projects, all of the above measures must be combined in the proper proportion. It is possible that what the customer desires does not exist in the current market dimension; therefore, it is necessary to listen to the customer’s needs without preconceived notions.
A project in Bhiwandi (on the outskirts of Mumbai) sold 1000 units in 2020 (yes, a lockdown slam dunk) by targeting a previously unexplored apartment price bracket, forcing the competition to slash prices arbitrarily to maintain sales volumes. FSI underconsumption (against the common practice) was one of the factors behind lower-than-market pricing.
Achieving this FSI inflection point reduced exposure to input costs on the majority of counts. Today, steel prices have increased by 50%. Lockdowns have resulted in a severe labor shortage.
Multi-Level Car Park (MLCP)
Choosing MLCPs over basements for parking (despite sacrificing ground coverage) and lowering building heights by optimizing FSI have the potential to generate far better margins for the developer despite lower ticket prices for customers and an incremental trade-off on land cost. Fast selling projects funded by the rapid inflow of receivables as the project rises.
Even more, the success of an affordable housing project depends on the planning, approvals, and financing. A growing influx of families from more expensive markets tends to increase the value of land in affordable micro-markets.
As a result, for all intents and purposes, locking in the price of land today reduces future opportunity costs. With staggered payments, this mechanism can accomplish the same objective for land bought outright.
A finish and highly-price product can be exchange for land use in a project for the highest price.
In the affordable context, an outright purchase sometimes outperforms JDAs, since they can boost project IRRs to insane levels. Such an investment typically has a shorter cash cycle for the capital provider. If win-win negotiation tactic with landlords, a significant portion of the land investment can split.
The receipt of approval sanction
In the best-case scenario, the receipt of approval sanction coincides with the receipt of a large and final tranche. The time lag between land acquisition and project launch is then reduce by a few weeks.
A better problem for an investor is a successful launch as opposed to timely approvals. A successful planning process can generate levered IRRs of 30 or more and gross PBT margins of at least 15.
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Customers are loyal to specific developers because of a sense of community inherent in their development.
The developer’s ability to handle local issues on and around the site, take a hard look at construction costs, and constantly course-correct while enabling multiple avenues for making home loans and CLSS available to customers (many of whom have income instability) is also critical in resolving the difficult yet immensely rewarding conundrum of affordable housing.